Asian refiners eye output cuts due to diesel surplus
Asian refiners are considering cuts to refined fuel output in the coming months, with some already trimming production in May, after excess diesel supplies squeezed profits, traders and analysts said.
Refiners also face higher crude costs after Saudi Arabia on Sunday raised prices for June-loading cargoes to their highest in five months. Lower refinery output could cap crude demand in Asia, home to top importers including China, India and Japan and weigh on global prices.
Refining margins in Singapore, the Asia bellwether, slipped under $4 a barrel in April from nearly $6 in March, LSEG data showed, despite several plants shutting for maintenance during low demand season in second quarter. DUB-SIN-REF
"Refining margins are expected to remain subdued in May and June, which will likely trigger run cuts on the margin for export-oriented refineries," said Ivan Mathews of consultancy FGE.
Taiwan's Formosa Petrochemical Corp 6505.TW, one of Asia's largest refined products exporters, cut its May run rate by about 3 percentage points to 82%, or 441,000 barrels per day (bpd), from an original plan of 85%, company spokesperson K.Y. Lin said.
"We're observing summer oil demand for June before deciding whether to adjust run rates further," he added.
South Korea's second-largest refiner, GS Caltex, is trimming output by 20,000-30,000 barrels per day in May, trade sources said.
"Margins are very weak right now but the problem is summer. Do you want to cut run when demand may be strong in summer?" one refining source said. "So I think refiners will cut, but small volumes."
However, South Korea's top refiner SK Energy has no plans to cut run rates in May-July, a source with knowledge of the matter said. The company declined to comment.
In China, Sinopec and PetroChina are mulling run cuts in June, eyeing export margins as they await more fuel export quotas to be issued, two people with knowledge of the matter said.
Sinopec and PetroChina did not respond to requests for comment.
Chinese state refiners are shipping large amounts of diesel overseas to offset weak domestic demand, although exports may ease in May as they have used up most of their quota, traders said.
WEAK DIESEL. The slump in refining margins is mainly caused by high diesel supplies as refiners in South Korea and Taiwan, encouraged by first-quarter strong margins, ramped up output at secondary units to maintain exports during maintenance, traders said.
However, diesel stocks soared to the highest in nearly three years in Asia hub Singapore last month as arbitrage opportunities to Europe remained closed. Stockpiles of the industrial fuel at the United Arab Emirates' Fujairah hub are also well above yearly averages since 2021.
Diesel shipments to Europe from Asia and the Middle East have fallen as ships must sail longer routes and freight rates for tankers carrying clean products jumped amid ongoing attacks by Yemeni Houthis on Red Sea ships.
Diesel demand elsewhere in Asia has also been lacklustre with only a handful of buyers from Vietnam and Australia taking their regular requirements. MDIS/TENDA
The recent selloff in diesel has also narrowed its spread with fuel oil, which is weighing on coking margins, said Royston Huan, an analyst at Energy Aspects.
"Rising supply and an increasingly bearish outlook for feedstocks once global gasoline cracks retreat seasonally will pressure margins, especially in Asia, meaning refiners will look at secondary units to trim discretionary output," said Huan.
Comments